Favre, 56, had been linked with a move to take over at Marseille in the summer before putting pen to paper in his new deal at the Borussia-Park.

Favre has previously coached Hertha Berlin in Germany.

"Lucien [Favre] has done an outstanding job in the past three years," Gladbach sporting director Max Eberl said in a club statement.

"Securing another year of first league football in 2011, and our return to Europe in 2012 are closely connected to his name.

"Our journey together is far from over and we are looking forward to our future collaboration."

The Swiss coach took charge of the Foals in 2011, and helped maintain their top-flight status via a relegation playoff triumph against VfL Bochum.

The following season, Gladbach finished fourth in the Bundesliga, but, having lost key players like Marco Reus to Borussia Dortmund and Dante to Bayern Munich, failed to progress into the Champions League group stage after losing their playoff against Dinamo Kiev.

Following a mid-table finish in 2013, Gladbach had been on course for a return to European football this season until the winter break. Despite a significant slump in form which sees them yet to record a win in 2014 and slip down to eighth in the table, they are still just three points behind fifth-placed Wolfsburg.